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The Department of Justice Office of the Inspector General’s stinging mortgage fraud audit focuses on Attorney General Eric Holder’s spirited book-cooking, which exaggerated the scale of prosecutions by an order of magnitude. The Obama administration still sticks to its narrative that the bust was the result of nefarious fraud-committing executives, rather than government subsidies for reckless loans. Yet the Inspector General’s report suggests that, given the scale of the market, the level of criminal fraud was small-scale: 107 persons charged (apparently mostly lower-level), with losses from criminal activity totaling $95 million, or about $900,000 in alleged losses per defendant.
In order to prove criminal fraud, the government must prove beyond a reasonable doubt that the defendant knowingly made material false representations that were justifiably relied on. The problems of proof, whether of the defendant’s knowledge of falsehood or of the borrower or loan purchaser’s inability to do the due diligence that would have revealed the falsehood, are obvious. If the alleged damages averaged only $900,000 per defendant, it would have been a poor use of prosecutorial resources to launch massive numbers of criminal cases, particularly since the DOJ was having significant success in extracting civil settlements from major institutions around three orders of magnitude larger than the $95 million in alleged fraud losses. (Settlements from mortgage servicers totaled $25 billion, and from J.P. Morgan Chase totaled $13 billion.)
With bubble-era government guarantees (express and implied) enabling borrowers to buy homes with virtually no money down, the number of low-quality loans exploded, as did the number of defaults in the subsequent bust. If the government required borrowers to have significant home equity, reckless or unethical lenders would have far fewer customers to collude with, and Attorney General Holder would have less need to invent mortgage fraud prosecutions. Unfortunately, Dodd-Frank’s Qualified Mortgage regulations continue to encourage reckless loans.
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